Econ--J. Aversa, The Post: "No Rate Action Expected"
washingtonpost.com
>>>No Rate Action Expected
By Jeannine Aversa
Associated Press Writer
Tuesday , October 3, 2000
WASHINGTON –– After pushing up interest rates for more than a year to brake the speeding economy, analysts believe the Federal Reserve will stay on the sidelines for the rest of this year. Higher rates have managed to slow economic growth to a more sustainable pace, they said.
Many private economists expect the Fed will repeat its June and August decisions not to boost interest rates, given mounting evidence that economic growth is moderating and that inflation – aside from a burst in energy costs – isn't worrisome.
"The economy is like a car that the Fed has been trying to slow. The Fed has its foot on the brake and we don't expect them to have to step on the brake any harder," said Gary Thayer, chief economist at the stock brokerage house A.G. Edwards & Sons Inc. in St. Louis.
The last rate movement was an aggressive half-point rate increase on May 16.
The Federal Open Market Committee, composed of Fed board members and regional bank presidents, was scheduled to meet behind closed doors Tuesday to discuss interest rate policy. An afternoon announcement was expected.
"The likelihood is that the Fed is going to take a break for the fall and the early winter," given the evidence of a slowdown, said Tim O'Neill, chief economist of Harris Bank in Chicago.
Various signs recently have shown that the economy, which grew at a sizzling rate of 5.2 percent in the first half of the year, is slowing in the second half of the year. Many analysts believe growth in the third and fourth quarters will average 3.5 percent or less.
Analysts said that other factors figure into their expectation the central bank will leave rates unchanged. They include rising oil prices, and stock market volatility, which can have the effect of discouraging consumer spending, thus dampening economic growth.
Those things "have punched the consumer in the chin," said David Jones, chief economist at Aubrey G. Lanston & Co. in New York.
Another factor: The belief among economists that the Fed would prefer to maintain a low profile at its last meeting before the presidential election on Nov. 7.
The Fed, starting in June 1999, has raised rates six times, pushing its federal funds rate, the interest that banks charge each other, up by 1.75 percentage points to 6.5 percent.
Those increases have triggered matching increases in banks' prime lending rate, the benchmark for millions of business and consumer loans, which now stands at 9.5 percent, a nine-year high.
But after a bold half-point increase in the federal funds rate on May 16, double the normal quarter-point move the Fed has made under Chairman Alan Greenspan, the central bank left rates unchanged at its June 28 and Aug. 22 meetings.
Some economists believe that if the Fed decides for a third time to leave rates alone it will be a signal that the central bank is declaring a cease-fire in its higher-rate campaign.
Some economists said they were expecting the Fed to telegraph its decision by switching the portion of its statement intended to foreshadow future actions to neutral. That would indicate the central bank views the risks of higher inflation and weaker growth as equally balanced going forward.
The Fed, however, has been indicating that it perceives inflation as a bigger risk to the economy.
Other analysts doubted the central bank would make that change. Such an announcement could spark an unwanted rally on Wall Street as investors got a clear signal that they could stop worrying about the risk of further Fed rate increases. The weakness in stock prices has been seen as one of the factors dampening consumer spending, something that has to occur for the economy to shift to slower growth.
Even if the Fed does not change its so-called policy bias, many analysts believe the central bank will remain on hold for the rest of this year. The next policy move, they said, could well be a reduction in rates, beginning perhaps as early as next spring.
© 2000 Associated Press<<< |
